The S&P 500 has turned in 16% average annual gains over the past three years, propelling the typical 401(k) balance to a record high this year, Fidelity reports. For workers 55 or older, it’s $255,000, nearly double what it was in March 2009, the depths of the bear market.
What stocks have in store now is crucial for early retirees, who might be inclined to count on continued high returns out of the gate. But stocks are looking expensive. Based on a conservative price/earnings ratio developed by Yale economist Robert Shiller, which uses 10 years of averaged profits, stocks are forecast to return 5% a year over the next decade. That could include down years as well.
Here’s why the market matters so much. Early on in retirement, you tend to spend more freely, as you can finally do all the things you were too busy to do when you worked: travel, eat out more, or indulge a costly hobby.
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